10 Canadian Companies Providing Dividend Growth Guidance

Two years ago, I posted a summary of Canadian companies that provide dividend growth guidance. I find this guidance useful as it helps me assess the capital allocation plans for companies, introduces a soft control by which to judge management's actions, and assists me in projecting the organic dividend growth rate of my portfolio for the next year. 

Of the Canadian companies that provide dividend growth guidance, Enbridge Inc. (TSE: ENB, NYSE: ENB) is likely the best known. During their Investor Day presentation yesterday (December 10th), they raised their dividend by 9.8% (slightly below their previous guidance of 10%), and said that after 2020, dividend growth was projected to be in the 5% - 7% range, in-line with their distributable cashflow growth projections. 

This downward adjustment to dividend growth guidance seems to be the norm lately for Canadian energy producers and pipeline companies. Given this trend of adjusting dividend guidance downward, and since it's the point in the year that dividend growth investors think about setting their dividend income goals for next year, I thought it would be an opportune time to update my list of Canadian companies providing dividend growth guidance. 

Please consider the table below a starting point for further research and let me know of any other Canadian companies that provide dividend growth guidance. I'll gladly update the table with your input. Lastly, I almost included BCE Inc. as management has stated their goal to grow their dividend by 5% next year. However, given management's language of the 5% dividend growth was pretty vague, I opted for the conservative approach of not including them below. 

TC Energy Corp (TRP)	Dividend growth of 8-10% through 2021, 5-7% after 2021
Enbridge Inc (ENB)	Dividend growth of 5-7% per year after 2020
Emera Inc (EMA)	Dividend growth of 4-5% per year through 2021
Telus Corp (T)	Dividend growth of 7-10% per year through 2022
Capital Power Corp (CPX)	Dividend growth of 7% per year through 2021, 5% in 2022
Fortis Inc (FTS)	Dividend growth of 6% per year through 2024
Algonquin Power (AQN)	Dividend growth of 10% per year through 2021
Brookfield Infrastructure Partners (BIP.UN)	Annual distribution increases of 5-9%
Brookfield Renewable Partners (BEP.UN)	Annual distribution increases of 5-9%
Brookfield Property Partners (BPY.UN)	Annual distribution growth of 5-8%

Does dividend growth guidance make you more likely to invest in a company? 

Tanger Factory Outlet Centers - Learn from my Mistakes

One of the more useful aspects of keeping my Transaction Journal is that when an investment goes south, I can go back and see what my reasons were for initiating or adding to a position. With Tanger Factory Outlet Centers ("Tanger") down 29% this year, it seemed like an opportune time to determine where my decision making could be improved before investing in another company in which I have lost about 40% of my initial investment.

Although I don't have a Transaction Journal entry for my initial establishment of a half position in Tanger on March 10, 2017, it was at $31.00 per share. That meant the starting yield was 4.2%, before management boosted the dividend by 5.4% in April 2017. I remember being interested in Tanger based on my past experience covering US-retailers at work, and having visited a number of Tanger outlet malls. The locations I visited were always busy, fully occupied by interesting stores, leaving positive impressions. The company had also partnered with RioCan REIT to open a location in Ottawa in 2016. My calculations based on some old FFO numbers suggests I initiated a position at a P/FFO of about 13X.

Based on the above, I can see a couple of risks that are common across other of my investments. Firstly, the 4.2% yield with an imminent dividend hike a month later would have been tempting. Add to this that I had a very limited, albeit positive view of the company based on my personal experiences. The kicker was likely the relatively cheap valuation, as I've always been reluctant to pay more than 15X earnings/FFO for companies/REITs.

Next is my entry from June 2017:

June 21, 2017
Buy - Added to half position of Tanger Factory Outlet Centers (NYSE: SKT) at $24.98
Reasons: With the valuation sitting around P/FFO of 10X, I think this discount mall REIT is one the biggest bargains I see in the US markets. The 5.5% yield, proven management team, and history of distribution growth throughout different points in the economic cycle all led me to add to this position.
Risks: Even though Tanger was down 3% when I bought for no reason, I do think it will go lower with any bad news/results in coming months. Chose to add now given my plans to discontinue paying the $30/quarter to my discount broker to give me a better CAD/USD exchange rate. Lastly, although I think the "death of the mall" rhetoric is overdone, I don't expect strong growth out of Tanger in 2017 given secular headwinds.

At the risk of sounding very self-critical, there are a couple of huge red flags. The fact I'm investing so that I can take advantage of a decent exchange rate to get the most out of a $30 fee; it's sad I'm stressing over sunk costs when I should be worried about capital preservation. Secondly, I seem to avoid asking myself why the company's stock is down almost 20% from my first purchase, and instead celebrating the cheaper valuation. It's odd that I expect the stock will fall lower, and growth won't happen in 2017, yet throw more money into the investment. On the plus side, at least I rightly identified those two risks.

Now for my last entry from October 2017.

October 27, 2017
Buy - Completed my position in Tanger Factory Outlet Centers (NYSE: SKT) at $23.00
Reasons: JC Penney cut their outlook for 2017 and I was able to purchase shares in Tanger at a ~5% discount to yesterday's price (which was a good deal at about P/FFO of 10X) in order to complete my position. Dual kickers: JC Penney isn't even a tenant of Tanger and by buying today, I will benefit from owning before the shares trade ex-dividend on Monday.
Risks: My bet is that Tanger will continue to trend downward in the short-term, and I'll likely miss out on buying at the bottom. That said, I can't time the market, and I view Tanger as a long-term holding. The way mall stocks are trading lately, the death of bricks-and-mortar retail seems to be imminent, even though online retail only accounts for about 10% of total US retail sales.

Buying before a company's stock goes ex-dividend continues to be a problem for me. This is clearly an issue of chasing pennies at the expense of losing dollars. Again, I foresee the stock falling lower, but am not prepared to wait for that to happen. My bet is that I had excess funds kicking around my RRSP that I wanted to invest before the end of 2017 in order to help meet my forward dividend income goal. Lastly, I throw in the 10% fact to justify my need to increase a falling position and annoy present me in the process.

Taking a step back, based on my entries, there are a couple lessons I can learn from my experience with Tanger.
- Investing in a company with a cheap valuation, without a thesis for what could happen in the future to raise the valuation, isn't a good idea. Cheap companies are sometimes cheap for a reason. My recent experience of paying a little more for great companies (i.e. Algonquin Power) shows I am capable of change.
- Buying shares prior to an ex-dividend date has no net benefit. I have to give up on chasing those pennies in order to save dollars.
- I have to work on my desire to keep myself heavily invested, with low cash amounts in all three of my investment accounts. It's sometimes alright to let cash sit idle for periods of time.
- Before adding to positions that are going down, I should revisit my initial investment thesis instead of simply justifying my actions as "averaging down". There should be valid reasons for continuing to invest in a company, not simply to complete positions.
- I have to stop generalizing my personal experiences and comfort level with a brand. I'm one of millions of Tanger customers, and my experiences are totally irrelevant to their success as a company.

Here's hoping you might be able to learn from my mistakes and avoid them yourself.

Is Enbridge's Dividend Sustainable?

Is Enbridge’s dividend sustainable? When @johnyboy1853 asked me that on Twitter at the end of September, I thought it was an excellent question. Afterall, the company’s dividend payout ratio of EPS was 108% in 2017, 133% in 2018, and 101% over the last four quarters ending September 30, 2019. Given Enbridge produces more dividend income for me than any other investment holding, a deeper dive was merited.

As scary as the payout ratios listed above look, I wanted to focus more on cashflows. Looking at the 2018 cashflow statement, the CFO of $10.5B and asset sales of $4.4B easily cover the $6.8B of CAPEX and $3.8B of dividends (common and preferred). However, over the last four quarters, the CFO of $9.9B and $2.5B of asset sales barely outpaced the $6.2B of CAPEX and $6.1B of dividends.

Although the past earnings and cashflows are important starting points to understand Enbridge’s dividend sustainability, investors should focus on the future to determine if Enbridge can keep affording to boost dividends by 10% in 2020. Looking at consensus estimates, analysts expect Enbridge to generate CFO of $10.8B in 2020, spend $5.5B on CAPEX, and pay out dividends of $6.7B. The $1.4B gap between outgoing cash and CFO would have to be made up via asset sales or debt issued. Enbridge had a target to sell $8B of non-core assets in 2019, so $1.4B of non-core assets would likely be very achievable for 2020.

Beyond the numbers, the sustainability of Enbridge’s dividend will ultimately be determined by the long-term success of their business model. With a large and diversified asset base, and pipelines throwing off predictable cashflows, there are reasons for optimism. Some key risks include the heavily regulated environment in which the company operates, reputation risks when spills occur, as well as Enbridge’s still highly leveraged capital structure (debt to EBITDA well over 5X at September 30, 2019).

Obviously my crystal ball is murky when it comes to Enbridge’s dividend sustainability. I did find it interesting that last December during their investor day, Enbridge’s management talked about growing their distributable cashflow by 5-7% after 2020. That seems like reasonable growth range given that TC Energy, a similar company, recently gave their long-term dividend growth range of 5-7% after 2021 during their investor day presentation. 

Do any of you feel like Enbridge won't be able to sustain their dividend for the next five years?

Three Self Storage REITs with Rising Dividends

Back in October 2016, I initiated a position in Life Storage Inc. ("LSI"), a US-based self-storage REIT that had a history of dividend growth dating back to 2012. I completed my position in December 2016 and my cost base was about $85/share. The company increased its dividend by 5.2% in April 2017, and has not raised its payout since.

For context, LSI managed to raise its revenue and funds from operations ("FFO") by 4% and 11% respectively in 2018. Both of those figures were up again through the first quarter of 2019. Having went through various investor presentations, earnings call transcripts and quarterly reports, I can't find any reason why the dividend growth came to a halt. Based on my frustration with the stagnant dividend and the fact the company is trading near a 52-week high, I've been thinking about replacing it with another self-storage REIT.

I created the table below to compare the five largest (by market capitalization) US self-storage REITs.



Based on the 1-year dividend growth (last column), CubeSmart ("CUBE"), Extra Storage Space ("EXR") and National Storage Affiliates ("NSA") became the obvious candidates to replace LSI in my portfolio. Although NSA is the cheapest priced with a Price/FFO ratio of 13.5X and has the highest dividend yield of 4.3%, it's also by far the smallest and most geographically concentrated REIT. I'm more attracted to CUBE and EXR given their large size and geographical diversity of locations.

These types of replace or hold decisions tend to baffle me and cause a great deal of over-analysis. That said, selling and replacing LSI has been one of the potential transactions at the forefront of my mind for a while now, and I promise to keep you updated on any decisions I make via my Transactions Journal.

Are you considering selling and replacing any of your holdings? Have you been successful of these types of replacement transactions in the past?

The 2 Vanguard ETF Experiment Continues - Year 4

In May 2016, I started my ETF experiment buying Vanguard FTSE Canada All Cap Index ETF ("VCN") and Vanguard FTSE All-World Ex Canada Index ETF ("VXC") for my son's Registered Education Savings Plan ("RESP"). Since that time, I added my daughter to the RESP, and have continued buying shares in VCN and VXC each year. After four years, it seems like a good time to check-in to see how this experiment has progressed.

I've stuck with the two ETF strategy for four years since it's fast, low cost, low maintenance and the ETFs produce returns in-line with the respective indices. Expanding a bit further, the time commitment to implement the strategy is about 5-10 minutes a year. After making my RESP contribution and waiting for the government of Canada to match 20% of it a couple months later, I simply calculate how much of the two ETFs I need to buy to maintain an equal dollar weighting. The low cost refers to the $20 per year I'm charged for buying shares in VCN and VXC. Unlike my other investment holdings which I monitor via news articles and filings, I don't monitor either ETF actively. When I'm conducting the performance analysis of my portfolio at year end, I usually spend a couple seconds seeing how closely each of the ETFs tracked their respective indices (answer: very). Then there's nothing to do until after the Government of Canada matches my contribution in the next year.

As smoothly as the ETF experiment has been going, I'll admit to making a stupid mistake for the second straight year. I bought shares in VCN and VXC earlier this month before the Government of Quebec added their Quebec Education Savings Incentive ("QESI") in the RESP. I keep forgetting that the QESI exists and to wait for it to be deposited before buying shares of the ETF. Now I'm stuck trying to figure if it makes sense to add a small number of shares to one of the ETFs by overweighting a position, or just wait until 2020. 

Despite the dumb mistake, I continue to enjoy the ETF experiment and have every intention to continue it until my kids head off to college, university, or a trade school. If anything, I have considered taking a two ETF approach to my personal investing. The simplicity makes the strategy very tempting. For those of you who are interested, my Investment Holdings to show the updated positions in VCN and VXC after the buy earlier this month.